We're on a Road to Somewhere
SEC Commissioner Hester Peirce has again proposed a path forward for crypto. This time, it might just happen. But maybe there is another way.
I started Brogan Law to provide top quality legal services to individuals and entities with questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help my clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email aaron@broganlaw.xyz.
Programming Note: Happy Presidents’ Day! As you may notice, this newsletter is coming a day late in the hope that you read it.
Last week, I told you that Hester Peirce’s recent statement “The Journey Begins” may be “literally the most important thing to happen in cryptocurrency since Trump’s inauguration.” Well, that stands.
Basically, Commissioner Peirce is proposing a liberalized approach to federal securities law that would allow for the sale of cryptocurrency tokens. Obviously, this matters a great deal to many of you, and we aren’t going to let another week go by without shining the spotlight on what could be ahead.
Commissioner Peirce says a few different things in the roadmap, but for our purposes, the most important is the discussion of how the Commission might apply securities laws differently moving forward. She says:
[T]he Task Force is working to help create a regulatory framework that both achieves the Commission’s important regulatory objectives—including protecting investors—and preserves industry’s ability to offer products and services. This framework will be within the statutory authority given to the Commission, and we will work with other regulators operating within their own statutory authorities. The statutes already on the books do not allow a free-for-all for products that fall within our jurisdiction. Congress has put parameters in place, and the Commission will apply them. Congress also has given us exemptive authority, and the Commission will use it, as appropriate. Where Congress has directed the Commission to impose requirements on market participants, SEC rules will not let you do whatever you want, whenever you want, however you want.
She then goes on to highlight some of the open questions that the Crypto Task Force is working on, including “[t]he status of crypto assets under the securities laws” and, crucially, “temporary prospective and retroactive relief for coin or token offerings.”
The statement goes on to discuss the conditions under which this relief might be available, noting that token issuers will have to “provide[] certain specified information, keeps that information updated, and agree[] not to contest the Commission’s jurisdiction in the event of a case alleging fraud in connection with the purchase and sale of the asset.” Structurally, Commissioner Peirce continues, “[t]hese tokens would be deemed to be non-securities.”
If you’ve been following cryptocurrency regulation for a while, you’ll notice that the proposal in this letter has some similarity to a proposal Commissioner Peirce made in 2021, called “Token Safe Harbor 2.0.”1
That plan was focused on permitting projects to reach maturity and “decentralization.” It notably proposed a “Rule 195.”
(a) Exemption. Except as expressly provided in paragraph (d) of this section, the Securities Act of 1933 does not apply to any offer, sale, or transaction involving a Token if the following conditions are satisfied by the Initial Development Team, as defined herein.
(1) The Initial Development Team intends for the network on which the Token functions to reach Network Maturity within three years of the date of the first sale of Tokens;
(2) Disclosures required under paragraph (b) of this section must be made available on a freely accessible public website.
(3) The Token must be offered and sold for the purpose of facilitating access to, participation on, or the development of the network.
(4) The Initial Development Team files a notice of reliance in accordance with paragraph (c) of this section.
(5) An exit report is filed in accordance with paragraph (f) of this section.
Now, in 2025, the emphasis on decentralization is replaced with a solution that “would bridge the gap until a more permanent rule or legislation could be finalized.” But otherwise, there is clear parallelism between these proposals.
Commissioner Peirce has been developing this safe harbor proposal for years, and the result is that it is (i) quite well conceived and (ii) relatively balanced between the interest of the SEC in maintaining oversight of capital markets and the interest of industry in opening wide the door for projects to raise money from the public.
The features of this safe harbor are adequately discussed elsewhere, so there is no need to dwell too much on them. It will allow projects to sell tokens, and require a degree of public messaging and reporting, but far less than a public security regime. While Commissioner Peirce would officially classify tokens as “non-securities”, she would have the Commission nonetheless retain oversight through semi-annual disclosures, filed notices of reliance, and exit reports.
It would be revolutionary.
As I see it, the major benefit of this safe harbor is that it is closely tailored to the SEC’s statutory authority. This means that this proposal could very likely be effectuated unilaterally through rulemaking, without any congressional involvement whatsoever. Commissioner Peirce is not the chair–that, as you know, will be Paul Atkins—but there is reason to believe the two commissioners will be aligned.2
There is one major downside to this proposition, however. It does not preempt state enforcement. I think the best way to understand this is to examine Comissioner Peirce’s legal footing.
Exemptive Authority
I won't bore you with the history of securities law in the United States—you can read my past posts on the subject here and here. Suffice to say, the Securities Act of 1933 (the “Securities Act”) is the main statutory basis for SEC oversight of primary cryptocurrency offerings.
The Securities Act has been modified numerous times by various other laws, and Section 28 (which is actually now 15 U.S. Code § 77z–3) empowers the SEC with general “exemptive authority.”
“The Commission, by rule or regulation, may conditionally or unconditionally exempt any person, security, or transaction, or any class or classes of persons, securities, or transactions, from any provision or provisions of this subchapter or of any rule or regulation issued under this subchapter, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.”
This is what Commissioner Peirce is referring to when she references “exemptive authority” from Congress. Through this language, the SEC is clearly allowed, with rulemaking if not unilateral non-enforcement, to exempt cryptocurrencies from compliance with the Securities Act.
Great, right? Wrong. Because the SEC is not the only game in town.
Before the Securities Act, there were “Blue Sky laws”, state security regimes, in every state. Despite the far more powerful regulator now occupying the space, these laws still exist. They empower state-level regulators to bring enforcement along much the same lines as the SEC might.
Or would, except that, in general, states are not actually legally allowed to. This is because another law, the National Securities Market Improvement Act of 1996 (NSMIA), explicitly preempts state enforcement.
Section 18 (now 15 U.S. Code § 77r) of NSMIA states that “no law, rule, regulation, or order, or other administrative action of any State or any political subdivision thereof requiring, or with respect to, registration or qualification of securities, or registration or qualification of securities transactions, shall directly or indirectly apply to a security that…” and then goes on to list a number of categories of “covered securities.” This list is flexible, as subsection (4)(F) states that the SEC can expand the definition with “respect to a transaction that is exempt from registration under this subchapter” by “rules or regulations issued under section 77d(2) [sic.]3 of this title.”
Despite this breadth, one thing that NSMIA definitely does not exempt from state regulation is non-securities exempt from SEC jurisdiction pursuant to Section 28 of the Securities Act. Those non-securities are not “exempt” under 77d(2) (sometimes called Section 4(a)(2)) but rather under Section 28. Because of this, under Commissioner Peirce’s proposal, states would have open season on cryptocurrency enforcement.
And that would be bad. There are already highly restrictive state regimes like New York’s Bitlicense that would prevent projects from accessing some states, and it is easy to imagine political pressure pushing more left-leaning states like Massachusetts and California to increase their state-level enforcement as well.
I don’t want to overstate this. The cryptocurrency lobby is well-funded and well organized. In the end, it would probably win near-nationwide accessibility. But it would require door-to-door fighting across every statehouse in America. The result would be a fragmented regime closer to current state-regulated gambling markets than nationwide capital markets. The cost of complying with a tangle of state regulations would force the bottom out of legal cryptocurrency and substantially chill new offerings.
It’s probably not existential, but it is a problem.
And as it turns out, this limitation may just be unavoidable without legislation. Commissioner Peirce cannot just waive a wand and create statutory preemption where there is none. However, there may be another way.
A Bolus of Law
Ok, sure, the SEC does not have the power to preempt state law for Section 28 non-securities. But it can preempt state law by rules and regulation for exempt securities issued pursuant to sections 77d(a)(2) and 77d(b).
Follow along with me for some extremely complex statutory interpretation.
Section 77d(a)(2) (commonly known as Section 4(a)(2)) exempts from registration “transactions by an issuer not involving any public offering”—private placements. This, obviously, is ambiguous, and its meaning was disputed until the 1953 Supreme Court decision in SEC v. Ralston Purina Co.
The test from Ralston Purina for differentiating public and private offerings remains good law today—the court considered “whether the particular class of persons affected need the protection of the Securities Act [or whether it is] [a]n offering to those who are shown to be able to fend for themselves.”
Over the years, the SEC promulgated rules to shape the Ralston Purina test into regulation, and eventually, in 1982, issued Regulation D. Reg D, as it is widely known, contains a series of rules, which change from time to time, and generally permits exempt sales of securities. Currently, the most popular form is Rule 506(b) which permits sales to accredited and some non-accredited investors, provided the offeror does a little bit of compliance (filing Form D, mostly) and doesn’t do any “general solicitation”, or public advertising.
For most of the History of Reg D, the limit on “general solicitation” was an immovable barrier to broad adoption of private securities. It was codified in Rule 502(c), but also assumed to derive from the language of Section 4(a)(2) prohibiting “public” offerings.
Assumed, that is, until the new Section 77d(b) was added to the Securities Act by the 2012 Jobs Act. Created as as part of a broader scheme to modify Rule 506 of Regulation D, the update permits general solicitation in certain conditions, stating:
Offers and sales exempt under section 230.506 of title 17, Code of Federal Regulations (as revised pursuant to section 201 of the Jumpstart Our Business Startups Act) shall not be deemed public offerings under the Federal securities laws as a result of general advertising or general solicitation.
This newly permissive scheme then became the basis for Rule 506(c)—which the JOBS Act instructed the SEC to promulgate. Note, however, the JOBS Act language. Rather than creating 506(c) as a new category of Reg D exempt securities, broadly covers any exempt security within Rule 506. We’ll come back to this.
In addition to this newly permissive general solicitation structure, all these Reg D exempt securities, premised upon the legal authority of Section 77d(a)(2), are also exactly the kind that preempt state law under NSMIA.
This is not to say that there are no limitations on these new exempt securities. The lawyers among you may be saying “Ah, but there is still a Rule 506(b) not permitting general solicitation, why is that?” The language of 77d(b) should arguably apply to that section too. Well, one answer is that the SEC chose not to modify the regs in that way, but there is actually a statutory basis too.
See, in addition to modifying the Securities Act, the JOBS Act itself contains another relevant limitation which is not incorporated in the Securities Act, but nonetheless modifies it. Section 201(a) of the JOBS Act state that “the prohibition against [general solicitation] does not apply to offers and sales of securities made pursuant to section 230.506, provided that all purchasers of the securities are accredited investors.” (emphasis added). Rule 506(b) permits some sales to non-accredited investors, so it cannot take advantage of the JOBS Act carveout.
This is less limiting than it may at first seem. As it turns out, “accredited investor” is itself a statutory term within the Securities Act, defined in 15 U.S. Code § 77b(a)(15) to include inter alia, “any person who, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial matters, or amount of assets under management qualifies as an accredited investor under rules and regulations which the Commission shall prescribe.” Realistically, this statutory definition is quite broad. The SEC has promulgated rules to refine this statutory definition, which are restrictive, but there is no legal reason they have to be. We’ll return to this.
For now though, consider what you have when you put all of these laws together. According to Section 4(a)(2) of the Securities Act and Ralston Purina, any non-public sale can be exempt, and for a sale to be non-public, the buyer must be able to “fend for themself.” According to NSMIA, state law does not apply to securities sold under this exemption. Under the JOBS Act, as long these securities are sold to accredited investors, their sellers may make a general solicitation. And, again under the Securities Act, accredited investors can be more or less whatever the SEC says they are, provided there is some basis in sophistication or wealth.
Despite the JOBS Act statutory modifications of the regs, Reg D was promulgated through rulemaking and can be modified by rulemaking, provided it does not otherwise violate statutory law. Under 77d(b), this means that the SEC can promulgate any number of subcategories of Rule 506, and they will all (i) preempt state law and (ii) permit general solicitation. If we call this hypothetical “Rule 506(f)” it could contain an entire universe of federal cryptocurrency regulation, all without a single word of new legislation.
Accredited Investors
To be fair, the SEC can’t just do whatever it wants with this Rule 506(f). It is limited by a few legal principles. First, it cannot create a “public security”, which under Ralston Purina means one that does not limit offerings to those who can “fend for themselves.” Since this test is already satisfied by accreditation alone under Rule 506(b), though, it should be satisfied by accreditation alone here. That’s good news, because the second statutory requirement is that this new rule must be available to accredited investors only in compliance with Section 201(a) of the JOBS Act.4
Now, currently, the accredited investor standard is highly restrictive—outside of banks, etc. it includes individuals earning more than $200,000 a year or with a net worth of greater than $1,000,000. Since 2020, it has also included a test-in component, but the tests, Series 7, Series 65, and Series 82, are only available to investment professionals.
There is no statutory reason, though, that it has to be this way. Remember, the definition is determined by “rules and regulations which the Commission shall prescribe” and the Commission explicitly may consider “financial sophistication, [ ], knowledge, and experience in financial matters.” This means, if the SEC chose, it could likely come up with any number of valid schemes to test accreditation.
The easiest to administer, and most sensible in my view, would probably be some kind of test. It can’t be trivially easy, it should test financial literacy and acumen, but it need not be prohibitively difficult either. Presumably, many more people could pass this test than currently are able to take the Series 7, Series 65, or Series 82. This should mean that many more people are able to gain accredited investor status, and also mean that under our Rule 506(f) framework, exempt cryptocurrency trading could suddenly become legally available to anyone with sufficient sophistication, knowledge and experience.
I’m not the first person to come up with the idea of test-in accreditation. Just a few weeks ago, Robinhood CEO Vlad Tenev argued for a liberalization of accredited investor rules in an op-ed in the Washington Post. Last year, the Wall Street Journal ran a piece on Rick Scott’s then-proposed legislation which would have created a test-in accreditation regime.5 Matt Levine of Bloomberg has frequently referenced the push in his column.
But, zooming out and taking all the relevant legislation together, it is apparent that the accredited investor definition is the critical fulcrum through which the SEC could permit rapid, broad liberalization of cryptocurrency regulation, without letting the states have a say. And that is quite something.
Is This a Good Idea, Though?
Off the bat, we can predict some counter-arguments. The Wall Street Journal quotes Patrick Woodall, managing director for policy at Americans for Financial Reform: “Knowledge cannot protect people from the potential losses if they invest in risky, opaque, and illiquid, private offerings… Only financial resources can.” This is the typical Liz Warren-approved financial-paternalist approach, but, legally at least, it has no merit.
Consumer protection is not the relevant test under Ralston Purina, it is whether an investor can “fend for themself.” The statutory definition of “accredited investor” explicitly references “financial sophistication, [ ] knowledge, and experience in financial matters” as relevant criteria. Mr. Woodall’s arguments are therefore a non-starter.
The bigger issue with my proposed Rule 506(f) regime is that, pre-empting the states though it does, it is not actually Pareto superior to Commissioner Peirce’s safe harbor. It does have that big advantage, but it is really only better in that one way. Otherwise, it limits the number of potential cryptocurrency investors in the United States, it complicates secondary market liquidity, and, most importantly, it will be messy and complicated to administer.
On top of all that, the Section 28 exemptive authority that Commissioner Peirce relies on is a simple, clean mechanism, whereas my Rule 506(f) approach is complex. I don’t think the applications I proposed are particularly speculative, but they sure take a while to explain. The chance of my rule losing in litigation is obviously higher than the chance of Commissioner Peirce losing.
In the world of regulating novel products by rulemaking alone, there are no solutions, only trade offs. At the top, I said that Commissioner Peirce’s safe harbor was well conceived—it is. But if the industry wants to push for a more aggressive path, it is available.
Commissioner Peirce mentioned that the Crypto Task Force is accepting written submissions at crypto@sec.gov and allowing industry participants to request meetings. Over the next few months, I hope to work with a few key clients to make proposals to the Task Force about the path forward. This could be a once in a generation opportunity to meaningfully shape American law. To all my current clients, if you are interested in making your voice heard and participating in this opportunity, you know where to find me. To anyone else interested in pursuing this, my email is always open at aaron@broganlaw.xyz.
Otherwise, until next week.
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Itself an update of her original safe harbor proposal from 2020.
Commissioner Peirce served as Mr. Atkins’ counsel when he was a commissioner between 2004 and 2008.
Note, the reference in Section 77r in the US Code as updated in 2023 is to “Section 77d(2)”, however, there is no Section 77d(2). Indeed, Section 77d does not use numbered subsections, but rather lettered subsections. Inferentially, Section 77r must be referencing Section 77d(a)(2), but I cannot explain the disparity here. Tentatively, I am guessing that it is a typographical error in the US Code, and so I have put a [sic.] in the text above, however it seems just as likely that I am missing something. If anyone reads this note (unlikely) and knows why the US Code has this apparent disparity (unlikelier still) please reach out and explain it to me. This is really bugging me.
In my reading, it could choose between forbidding “general solicitation” and required accreditation. In my view, general solicitation is a required predicate for any legal cryptocurrency framework to function.
Again, I do not believe this requires legislation.